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A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
Ravi Bansal,Ivan Shaliastovich +1 more
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TLDR
In this article, the authors develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation, which simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets.Abstract:
We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.read more
Citations
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Expected Returns in Treasury Bonds
TL;DR: The authors decompose US Treasury yields into inflation expectations and maturity-specific interest rate cycles, and derive a measure of risk premium variation from yields, which is defined as variation in yields orthogonal to expected inflation.
Journal ArticleDOI
Long Run Risks, the Macroeconomy, and Asset Prices
Ravi Bansal,Dana Kiku,Amir Yaron +2 more
TL;DR: In this paper, the role of cyclical fluctuations and macroeconomic crises on asset prices and expected returns has been investigated in a generalized LRR model, which allows us to study the role cyclical changes in consumption growth and volatility.
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Variance Risk Premiums and the Forward Premium Puzzle
Juan M. Londono,Hao Zhou +1 more
TL;DR: In this article, the authors provide new empirical evidence that world currency and U.S. stock variance risk premiums have non-redundant and significant predictive power for the appreciation rates of 22 currencies with respect to the US dollar, especially at the 4-month and 1-month horizons.
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Bond risk premiums with machine learning
TL;DR: The authors show that machine learning methods, in particular, extreme trees and neural networks (NNs), provide strong statistical evidence in favor of bond return predictability, and that NN forecasts based on macroeconomic and yield information translate into economic gains that are larger than those obtained using yields alone.
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International Asset Pricing with Recursive Preferences
TL;DR: In this article, the authors focus on data from the United States and the United Kingdom and show that both the anomaly identified by Backus and Smith, which concerns the low correlation between consumption differentials and exchange rates, and the forward premium anomaly, which concerned the tendency of high interest rate currencies to appreciate, have become more severe over time.
References
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Journal ArticleDOI
THE EQUITY PREMIUM A Puzzle
Rajnish Mehra,Edward C. Prescott +1 more
TL;DR: This paper showed that an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.
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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
Posted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
Posted Content
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
Ravi Bansal,Amir Yaron +1 more
TL;DR: In this article, the authors show that news about growth rates significantly alter agent's perceptions regarding long run expected growth rates and growth rate uncertainty, which leads to a large equity risk premium, low risk free interest rate, and large market volatility.
Journal ArticleDOI
Forward and spot exchange rates
TL;DR: In this paper, the authors find that most of the variation in forward rates is variation in premium, and the premium and expected future spot rate components of forward rates are negatively correlated, and they conclude that the forward market is not efficient or rational.
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Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
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